The Fresh Market Is Quietly Stalking WFM

by Lawrence Meyers | December 4, 2012 9:27 am

Whole Foods Market (NASDAQ:WFM[1]) took awhile to become the juggernaut that it is.

Although founded in 1978, the company engineered much of its rapid growth via acquisition of smaller organic food chains. Fans of Wellspring Grocery, Bread & Circus, Mrs. Gooch’s Natural Foods Markets of Los Angeles, Bread of Life of Northern California, Fresh Fields Markets, Merchant of Vino and Nature’s Heartland all saw their little markets gobbled up. Then came the big one with Wild Oats Market, and Whole Foods ruled North America with 343 stores.

I didn’t think Whole Foods had any other challengers … that is, until The Fresh Market (NASDAQ:TFM[2]) reported earnings last week.

In the spirit of full disclosure, I’d never heard of the company before. But that is why I scan earnings calendars: I might find a diamond in the rough, and The Fresh Market is exactly that.

The company’s own website suggests The Fresh Market is a bit of a cross between Whole Foods and Bristol Farms, a privately held company that operates 14 stores out here in California, though it was once owned by the struggling SuperValu (NYSE:SVU[3]) chain. The Fresh Market appeared in 1981 and has 128 stores around the United States.

TFM’s most recent quarterly earnings were impressive, even if they missed analyst estimates. Revenue was up 22% to $321 million, and earnings up 21% to 23 cents per share. Gross margin improved 110 basis points to 33.1% and net margin was 3.4%, down 10 basis points.

But for a company like this, you really have to dig deeper into the numbers to get an idea as to just how well it is doing.

Through the first three quarters of 2012, The Fresh Market also saw a 22% revenue increase, with the all-importantcomparable-store sales up 7.8%. Net income was up 31%, as were diluted EPS.

TFM’s balance sheet looks great, with $15 million in cash and a modest $47 million in debt, down from $64 million at the start of the year. The company has managed its growth through solid cash flow, which it has been using to fund capital expenditures related to opening 16 new stores (including entering California and Texas).

This company does not overbuild. The Fresh Market is taking its time, and the prudence with which it is expanding — while also paying down debt — shows the kind of balance sheet management I like to see.

Analysts like what they see, too. Projected EPS growth is 27% this year, 23% next year and 23% over the next five years.

The problem, however, is the cat is out of the bag.

The Fresh Market might be an undiscovered gem to yours truly, but the market is putting a nearly 40x multiple on it. Meanwhile, Whole Foods is trading at 32x earnings. Both have a PEG ratio of almost 2, which means they might be overvalued by as much as 100%!

So, I don’t think The Fresh Market is the place to be as far as value investing is concerned. That said, I would very seriously consider buying the stock on a big drop.

Indeed, if Whole Foods made its bones by buying up lots of little chains and a big one called Wild Oats, the next target might very well be The Fresh Market itself.

As of this writing, Lawrence Meyers[4] did not hold a position in any of the aforementioned securities. He is president of PDL Capital, Inc.[5], which brokers secure high-yield investments to the general public and private equity. He also has written two books[6] and blogs about public policy[7], journalistic integrity[8], popular culture[9] and world affairs[10].